CMS Proposes Major Overhaul to Readmission Penalties: What HIM Professionals Must Know

In the Fiscal Year (FY) 2026 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) proposed rule, the Centers for Medicare & Medicaid Services (CMS) announced significant updates to the Hospital Readmissions Reduction Program (HRRP).

CMS is proposing five major changes that will substantially impact how hospitals and health systems approach readmission management. If finalized, these updates will necessitate important strategic adjustments aimed at preventing readmissions.

Here’s a breakdown of the proposed changes:

1. Inclusion of Medicare Advantage (MA) Data

Traditionally, the HRRP evaluated hospital readmission rates using only Medicare Fee-for-Service (FFS) data. Now, CMS proposes to expand this to include patients enrolled in Medicare Advantage plans across all six readmission measures. According to CMS, this change is intended to deliver a more complete picture of hospital performance across the full Medicare population and supports the agency’s broader initiative toward data harmonization.

2. Elimination of COVID-19 Exclusions

Previously, CMS excluded patients diagnosed with COVID-19 from the denominator in readmission measures to mitigate the pandemic’s impact on hospital performance. The new proposal would eliminate these COVID-19-related exclusions across all six measures, signaling a return to standard reporting protocols.

3. Shortening of the Applicable Data Collection Period

CMS recommends reducing the measurement period for readmission data from three years to two years. This adjustment would allow for more timely evaluations of hospital performance.

4. Revision of the DRG Payment Adjustment Formula

Alongside the inclusion of MA patient data, CMS proposes modifications to the diagnosis-related group (DRG) payment ratios used in HRRP payment adjustments. The revisions aim to ensure that penalties accurately reflect the expanded patient population and the differing cost dynamics between MA and FFS enrollees.

5. Clarification of the Extraordinary Circumstances Exception (ECE) Policy

CMS also plans to update and codify the ECE policy. The proposed clarification reaffirms that CMS retains discretion to grant exceptions based on hospital-submitted requests and aims to streamline the process and enhance transparency for hospitals affected by extraordinary events like natural disasters or systemic disruptions.

HRRP and Medicare Advantage (MA) Readmission Denials

An emerging tension is becoming increasingly evident: while hospitals will be newly accountable for MA patient readmissions under the HRRP, Medicare Advantage plans themselves seem shielded from parallel consequences under the Medicare Star Ratings system.

As previously discussed, current HEDIS (Healthcare Effectiveness Data and Information Set) submission requirements do not compel MA plans to report every hospital readmission. Since HEDIS relies on self-reported, paid claims data, MA plans only have to submit information for readmissions they have approved for payment. Denied or bundled claims, therefore, are not captured in MA Star Rating calculations, potentially leading to an underreported readmission rate.

This discrepancy creates a regulatory imbalance. Hospitals will now bear financial penalties for MA patient readmissions under HRRP — even in cases where MA plans deny payment for the readmission. As a result, hospitals could face both denied payments and HRRP penalties for the same event, while MA plans remain largely unaffected.

Although the FY 2026 IPPS proposed rule reflects CMS’s intent to promote accountability across all Medicare populations, true equity will not be achieved until MA plans are subjected to equivalent transparency and quality reporting requirements.

For now, the burden of readmission accountability continues to fall disproportionately on hospitals.